The Truth About Raising Taxes and Tax Collections

DJH: Have you ever heard someone refer to democrats and republicans as “tweedledee and tweedledum?” When they do, they’re claiming that these is no real difference between the two parties. Sometimes that’s certainly true, but fortunately, not always.

One of the big differences between to two parties has to do with the way they think about RaisingTaxes and Tax Collections; in this regard, they are generally as far apart as you can get.

Democrats believe that increasing tax rates or adding new taxes will increase tax collections on a dollar for dollar basis. If they need another $300 billion to fund some program, just raise the top income tax by 3% and voila – you get the money and you can call yourself “fiscally responsible.”

Republicans, on the other hand, understand that real world behavior is different. When people decide that a new tax or a tax increase is too high, they find a way to avoid paying it, which usually means that the government ends up with less tax collections. This is also known as the Laffer Curve.

I have been thinking about writing a piece that explains the Laffer Curve in plain English, but quickly realized that was too difficult. So instead, I’ll give you a few stories that will prove the point beyond a shadow of a doubt.

My friend Mark Perry from the University of Michigan sent out a story last night that illustrates the flaw in the Obama/democrat logic that they can raise tax collections by raising tax rates or creating new taxes:

“President Barack Obama’s new health-care legislation aims to raise $210 billion over 10 years to pay for the extensive new entitlements. How? By slapping a 3.8% “Medicare tax” on interest and rental income, dividends and capital gains of couples earning more than $250,000, or singles with more than $200,000.

The president also hopes to raise $364 billion over 10 years from the same taxpayers by raising the top two tax rates to 36%-39.6% from 33%-35%, plus another $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and another $500 billion by capping and phasing out exemptions and deductions.

Add it up and the government is counting on squeezing an extra $1.2 trillion over 10 years from a tiny sliver of taxpayers who already pay more than half of all individual taxes.

It won’t work. It never works. Punitive tax rates on high-income individuals do not increase revenue. Successful people are not docile sheep just waiting to be shorn.”

Mark then went on to cite numerous stories from across the nation that back this statement up.

“Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”

“The number of self-reported million-dollar earners in Maryland has dropped by roughly a third compared with this time last year, renewing debate yesterday about whether the state’s year-old “millionaires’ tax” is driving rich people beyond its borders.”

From past experience, these are just a few of the ways that taxpayers will react to the Obama administration’s tax plans:

• Professionals and companies who currently file under the individual income tax as partnerships, LLCs or Subchapter S corporations would form C-corporations to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.

• Investors who jumped into dividend-paying stocks after 2003 when the tax rate fell to 15% would dump many of those shares in favor of tax-free municipal bonds if the dividend tax went up to 23.8% as planned.

• Faced with a rapid phase-out of deductions and exemptions for reported income above $250,000, any two-earner family in a high-tax state could keep their income below that pain threshold by increasing 401(k) contributions, switching investments into tax-free bond funds, and avoiding the realization of capital gains.

• Faced with numerous tax penalties on added income in general, many two-earner couples would become one-earner couples, early retirement would become far more popular, executives would substitute perks for taxable paychecks, physicians would play more golf, etc.

From the Baltimore Sun— Top Payers Fade Away; Maryland Was Depending On Taxing Millionaires, But They’re Disappearing.

“A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state’s finances and make the tax code more progressive.

But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million.”

So keep this in mind every time you hear Obama or some other democrat talk about raising taxes on the rich to cover their runaway deficit spending. It’s never worked and it certainly won’t work this time. By the way, Obama and most of his cronies are fairly well educated in the laws of economics and they know that raising taxes never brings in more tax collections — so why do they insist on doing it?

The economic truth is that there is only one way to cut deficits and that is to cut spending. But 86% of federal spending is mandated by bad laws or contracts that cannot be cut! The time has come to bust those contracts and the first cuts we have to make is to the salaries of government workers, then dump the automatic cost of living adjustments (COLA) in government worker pensions and other entitlements (as well as a few other ideas outlined in my recent eBook Chronic Deficit Spending: The End of Life as We Know It?)

Anyone got a better idea?

Dave

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3 Responses

You want to talk about bloated government spending? Somehow no one talks about the incredibly bloated retirements the members of Congress get after serving only one term. My understanding is upon the death of the Congressperson, his spouse continues to collect the retirement. Please tell me if I’m wrong.
Add that to free medical care for life and you’re talkin’ about a helluva deal.
As Everett Dirksen said: “[Think these are just] drops in the bucket? … A million here, a million there, and pretty soon you’re talking about real money.”

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[…] Unfortunately, most of the proof is anecdotal. For example, last month I did a piece called “The Truth About Raising Taxes and Tax Collections” that had numerous examples of the wealthy taxpayer exodus that has followed all of the […]